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The MIT Press Journals

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Vol. CXVIII February 2003 Issue 1


This paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the United States using individual tax returns data. Top income and wages shares display a U-shaped pattern over the century. Our series suggest that the large shocks that capital owners experienced during the Great Depression and World War II have had a permanent effect on top capital incomes.We argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks. Top wage shares were flat before World War II, dropped precipitously during the war, and did not start to recover before the late 1960s but are now higher than before World War II. As a result, the working rich have replaced the rentiers at the top of the incomedistribution.

I. INTRODUCTION According to Kuznets’ influential hypothesis, income inequality should follow an inverse-U shape along the development process, first rising with industrialization and then declining, as more and more workers join the high-productivity sectors of the economy [Kuznets 1955]. Today, the Kuznets curve is widely held to have doubled back on itself, especially in the UnitedStates, with the period of falling inequality observed during the first half
* We thank Anthony Atkinson, Lawrence Katz, and two anonymous referees for their very helpful and detailed comments. We have also benefited from comments and discussions with Daron Acemoglu, Philippe Aghion, Alberto Alesina, David Autor, Abhijit Banerjee, Francesco Caselli, Dora Costa, David Cutler, Esther Duflo, DanielFeenberg, William Gale, Claudia Goldin, Alan Krueger, Howard Rosenthal, and numerous seminar participants. We acknowledge financial support from the MacArthur foundation. All our series are available in machine readable format in an electronic appendix of the working paper version at www.nber.org/papers/W8467.

2003 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnology. The Quarterly Journal of Economics, February 2003




of the twentieth century being succeeded by a very sharp reversal of the trend since the 1970s. This does not, however, imply that Kuznets’ hypothesis is no longer of interest. One could indeed argue that what has been happening since the 1970s is just a remake of the previous inverse-Ucurve: a new industrial revolution has taken place, thereby leading to increasing inequality, and inequality will decline again at some point, as more and more workers benefit from the innovations. To cast light on this central issue, we build new homogeneous series on top shares of pretax income and wages in the United States covering the 1913 to 1998 period. These new series are based primarily ontax returns data published annually by the Internal Revenue Service (IRS) since the income tax was instituted in 1913, as well as on the large micro-files of tax returns released by the IRS since 1960. First, we have constructed annual series of shares of total income accruing to various upper income groups fractiles within the top decile of the income distribution. For each of these fractiles wealso present the shares of each source of income such as wages, business income, and capital income. Kuznets [1953] did produce a number of top income shares series covering the 1913 to 1948 period, but tended to underestimate top income shares, and the highest group analyzed by Kuznets is the top percentile.1 Most importantly, nobody has attempted to estimate, as we do here, homogeneous series...
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